The Fiscal Theory of the Price Level: Identifying Restrictions and Empirical Evidence

Luca Sala ()

No 257, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: This paper aims to test some implications of the fiscal theory of the price level (FTPL). We develop a model similar to Leeper (1991) and Woodford (1996), but extended so to generate real effects of fiscal policy also in the "Ricardian" regime, via an OLG demographic structure. We test on the data the predictions of the FTPL as incorporated in the model. We find that the US fiscal policy in the period 1960-1979 can be classified as "Non-Ricardian", while it is "Ricardian" since 1990. According to our analysis, the fiscal theory of the price level characterizes one phase of the post-war US history.

Date: 2004
New Economics Papers: this item is included in nep-mac and nep-mon
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